📈 Internal and External Growth
Big Idea: Businesses can grow internally (from within, using their own resources) or externally (by joining with or buying other businesses). Each approach has different benefits and risks.
Internal (organic) growth
Internal growth means expanding gradually using the business’s own resources, for example opening new locations, developing new products, or increasing marketing to attract more customers.
- Advantages: easier to manage, lower risk, maintains company culture, financed from retained profits, growth is sustainable
- Disadvantages: slow process, limited by available resources, competitors may grow faster externally, may miss time-sensitive opportunities
A local café opens a second location across town, funded by its own profits. This is internal growth: slow but manageable.
External growth
External growth involves joining with or buying other businesses. It is faster but riskier.
- Merger: two businesses of roughly equal size agree to combine into a new entity. Both sets of shareholders must approve
- Acquisition (takeover): one business buys another. This can be friendly (agreed) or hostile (against the target’s wishes)
- Joint venture: two or more businesses create a new, separate entity together to pursue a specific project or opportunity. Both contribute resources and share risks
- Strategic alliance: businesses cooperate on specific projects while remaining separate and independent organisations
Merger vs Acquisition: Merger = agreed combination as equals. Acquisition = one buys and takes control of another. In reality, many ‘mergers’ involve one dominant partner, so the line can be blurry.
Two mid-sized pharmaceutical companies merge to combine research capabilities. A tech giant acquires a start-up for its innovative technology. A car manufacturer and battery company form a joint venture to develop electric vehicles.
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How businesses integrate
When businesses merge or acquire, the type of integration depends on their relationship in the supply chain.
- Horizontal integration: merging with a competitor at the same stage of production
- Forward vertical integration: buying a business closer to the customer (for example, a manufacturer buying a retail chain)
- Backward vertical integration: buying a business closer to raw materials (for example, a manufacturer buying a supplier)
- Conglomerate integration: merging with a business in a completely different industry
A car manufacturer buying a tyre factory = backward vertical integration. The same manufacturer buying a chain of dealerships = forward vertical integration. Buying an airline = conglomerate integration.
Horizontal = same level. Vertical = different levels (forward = toward customer, backward = toward supplier). Conglomerate = unrelated industry. 🏗️
Why businesses grow
- Economies of scale: larger businesses can reduce average costs
- Increased market share: more customers and greater influence over the market
- Diversification: spreading risk across different products or markets
- Access to new markets: geographic or demographic expansion
- Survival: in some industries, businesses must grow or risk being outcompeted
Risks of growing too fast
- Loss of control and quality: harder to maintain standards as the business expands
- Culture clash: merging organisations may have different values and ways of working
- Cash flow problems: growth requires investment before returns are generated
- Diseconomies of scale: becoming too big can make the business less efficient
- Management overstretch: leaders may struggle to manage a much larger organisation
- Integration difficulties: combining systems, processes and people is complex
In exam discussions of growth strategies, weigh advantages against risks. The best answers consider both sides.
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📈 Internal and External Growth
Big Idea: Businesses can grow internally (from within, using their own resources) or externally (by joining with or buying other businesses). Each approach has different benefits and risks.
Internal (organic) growth
Internal growth means expanding gradually using the business's own resources -- opening new locations, developing new products, or increasing marketing to attract more customers.
- Advantages: easier to manage, lower risk, maintains company culture, financed from retained profits, growth is sustainable
- Disadvantages: slow process, limited by available resources, competitors may grow faster externally, may miss time-sensitive opportunities
A local cafe opens a second location across town, funded by its own profits. This is internal growth -- slow but manageable.
External growth
External growth involves joining with or buying other businesses. It is faster but riskier.
- Merger -- two businesses of roughly equal size agree to combine into a new entity. Both sets of shareholders must approve
- Acquisition (takeover) -- one business buys another. This can be friendly (agreed) or hostile (against the target's wishes)
- Joint venture -- two or more businesses create a new, separate entity together to pursue a specific project or opportunity. Both contribute resources and share risks
- Strategic alliance -- businesses cooperate on specific projects while remaining separate and independent organisations
Merger vs Acquisition: Merger = agreed combination as equals. Acquisition = one buys and takes control of another. In reality, most mergers involve one dominant partner, so the line is blurry.
Two mid-sized pharmaceutical companies merge to combine their research capabilities. A tech giant acquires a small start-up for its innovative technology. A car manufacturer and a battery company form a joint venture to develop electric vehicles.
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How businesses integrate
When businesses merge or acquire, the type of integration depends on their relationship in the supply chain.
- Horizontal integration -- merging with a competitor at the same stage of production (e.g. two car manufacturers merging)
- Forward vertical integration -- buying a business closer to the customer (e.g. a manufacturer buying a retail chain)
- Backward vertical integration -- buying a business closer to raw materials (e.g. a manufacturer buying a supplier of components)
- Conglomerate integration -- merging with a business in a completely different industry (e.g. a food company buying a technology firm)
A car manufacturer buying a tyre factory = backward vertical integration (moving toward raw materials). The same car manufacturer buying a chain of car dealerships = forward vertical integration (moving toward the customer). The car manufacturer buying an airline = conglomerate integration (unrelated industry).
Horizontal = same level. Vertical = different levels (forward = toward customer, backward = toward supplier). Conglomerate = different industry entirely.
Why businesses grow
- Economies of scale -- larger businesses can reduce average costs
- Increased market share -- more customers and greater influence over the market
- Diversification -- spreading risk across different products or markets
- Access to new markets -- geographic or demographic expansion
- Survival -- in some industries, businesses must grow or risk being outcompeted
Risks of growing too fast
- Loss of control and quality -- harder to maintain standards as the business expands
- Culture clash -- merging organisations often have different values and ways of working
- Cash flow problems -- growth requires investment before returns are generated
- Diseconomies of scale -- becoming too big can make the business less efficient
- Management overstretch -- leaders may struggle to manage a much larger organisation
- Integration difficulties -- combining systems, processes and people is complex
In exam discussions of growth strategies, always weigh the advantages against the risks. The best answer considers BOTH sides.